Good news on GDP

You can see evidence a stifled recovery everywhere these days. Everywhere, that is, except the official statistics. Today's 0.8% quarterly growth figure is the strongest third quarter figure in a decade.

The GDP numbers are going to jump around a lot over the next year or so - they always do. But if you look through the quarterly ups and downs, today's preliminary estimate suggests that the UK economy is now 2.8% bigger now than it was a year ago. They also suggest that the UK has been growing, on average, at an annualised rate of roughly 3.2% since the start of 2010.

Beneath that headline average, the strongest sectors have been construction, distribution, hotels and restaurants, and business and financial services. If the figures are right, output in the construction industry is now 11% higher than it was a year ago; the distribution sector is up 3.2%; and business and financial services have grown by 2.9%.

Interestingly, government and other public services have grown by just 1.1% over the past year, though remember that this does not cover all of the ways that government supports the economy; as I've discussed in the past, public investment money often takes a year or more to feed through into output.

So, there's no doubt that the figures tell us good news about the recent past. What about the future?

The government would say it shows that fears of a stifled recovery are greatly overdone. The opposition - the so-called "deficit-deniers" - would say it shows that spending cuts have yet to bite. Who is right?

The honest answer is that we don't know. But, on the government's side, remember that the primary government deficit - the gap between spending and revenues, before debt interest, has fallen by more than 3% of GDP in the past 12 months (see my post of 13 October for the precise details). By that measure, fiscal policy has tightened more in the past 12 months than in any single year of the government's plan. But somehow, the economy has managed to grow by 2.8%, roughly its long-term trend rate.

You might hope to grow a bit faster than that after such a deep recession. But in past recoveries, it has usually taken some time for the recovery to build up solid momentum. This is unlikely to be an exception.

The lurking fear, in these numbers, can only be that the UK is behind the curve. After all, growth was strong in the early part of the US recovery, as well, only to slip back sharply in the summer. Given the dependence of UK exporters on the US market - and signs of weakening consumer confidence here at home, you still have to wonder whether this level of momentum can be sustained.

That will be one question that the Bank of England's MPC will focus on when it meets next month, with a new set of quarterly set of forecasts. The other question will be whether we are raising our expectations of inflation, as a result of the official CPI measure staying so long above its target rate.

Before today, there was perhaps a 50-60% chance that a majority on the committee would support more quantitative easing. I suspect that probability has now fallen. But with most economists still forecasting sub-par growth in 2011, I wouldn't rule it out - if not next month, then early next year.

There is still plenty to worry about in this recovery: much of it beyond our shores, and beyond the government or the Bank of England's control. But for today at least, I think we're allowed to join the cabinet in a sigh of relief.

Related

Once again, many in the City will be scratching their heads at the first estimate of growth in the first three months of this year from the Office for National Statistics (ONS). Most City economists thought it would be a bit larger.
However, the gap between the City and the ONS is not as large as it has been in recent quarters - on the order of two tenths of a percent. And this time there are at least good reasons why the recovery might have lost a bit of momentum at the start of the year.

For once, the first estimate for growth in the first quarter is in line with expectations - but it would be hard to argue that it's good news.
Not so long ago, many were hoping for a strong bounceback from the slowdown at the end of 2010. Instead, the figures suggest that the UK economy has barely grown at all since the summer. However, even more than usual, it's important to look behind the headline.

So President Trump wants U.S. economy growing at 4 percent per annum. And he wants a trade tussle with Mexico and China, and possibly much of the rest of the world, or may be a trade war, not a tussle. And he wants tariffs on imports from Mexico to pay for the Wall. And all of this is as likely to support his 4 percent growth target, as a crutch is to support a two-legged sheep.

For once, the soothsayers were right. Britain's GDP rose by 0.5% in the first quarter compared with the previous three months, in line with forecasts. Most of the economy had a decent enough start to the year: services output was up by 0.9% and manufacturing grew by 1%. The laggard, and the reason why analysts had reduced their forecasts in recent weeks, was the construction industry, where output fell by almost 5%, enough to take 0.3 percentage points off the quarterly growth rate.

Predictably, politicians on both sides of the argument over the economy have taken today's figures as support for their view.
For Chancellor Osborne, the strength of the recovery shows he was right to start cutting the deficit faster, and sooner. But naturally Alistair Darling says it shows he was right to support the economy when he did - and that Mr Osborne's plans are putting the recovery at risk.
Surprise surprise, I don't think this one set of figures decides the issue either way.

People who insist that the US has a gigantic "spending problem" are ignorant of what really drives the deficit and the national debt, as Henry Blodget easily demonstrated in a series of charts. Closing the deficit is not just about lowering spending, relative to GDP, but also about increasing revenue from our very low levels. So how is that accomplished? When people talk about the deficit, they almost always use the "pain" metaphor.